Fonterra underlined the extent of the dairy market reversal by slashing its forecast for2014-15 milk prices to 37% below last season's high, and warning of the potential for further downgrades

The New Zealand-based group, the world's biggest dairy exporter, cut by NZ$0.70 per kilogramme of milk solids, to a six-year low of NZ$5.30 per kilogramme of milk solids, its forecast for the price it pays farmers for milk in the season which began in June.

The forecast compares with a record NZ$8.40 per kilogramme of milk solids paid for milk last season and, in value terms - with Fonterra's milk collection at 1.6bn kilogrammes of milk solids a year and rising – equates to a drop in farmer incomes of totalling roughly NZ$5bn ($4.0bn).

With dairy a key industry for New Zealand, the world's biggest milk exporting country, the immediate market reaction was to send the New Zealand dollar to a one-year low of $0.804.

'Significant volatility'

And Fonterra - noting an "imbalance" between burgeoning milk supplies compared with demand - warned that there was "further downside risk" to its milk price forecast, which was  factoring in some revival in values ahead.

"The forecast farmgate milk price is reduced based on current estimates of future pricing," said John Wilson, the chairman of the co-operative, which had already in July cut its 2014-15 milk price forecast, from NZ$7.00 per kilogramme of milk solids.

"There remains significant volatility in international dairy commodity prices and, given this, this forecast is our best judgment at this time."

Mr Wilson urged "caution with regards to on-farm budgets in this environment of continuing uncertainty".

'Back to auction-watching'

The market uncertainty was highlighted by analysts, with ASB bank, citing continuing jitters stemming from Russia's ban on dairy imports from a range of Western countries, warning that there was "still some downside risk" to prices.

At TD Securities, Annette Beacher noted that Fonterra's downgraded payout estimate was "a little better than expected", given market expectations of a figure nearer to $5.00 per kilogramme of milk solids.

"But [it] relies on a rebound in dairy prices to be sustainable," she said.

"So we are back to auction-watching twice monthly to gauge if this is the last downgrade, or if further pain for farmers lies ahead."

Fonterra runs the twice-monthly GlobalDairyTrade auctions at which dairy prices have so far this year fallen by more than 40%.

'Challenging global situation'

Fonterra blamed the milk price downturn on a "challenging global situation in key dairy regions", after last season's high prices prompted a production boom worldwide which has not been matched by import demand.

Indeed, in the major exporting countries, milk output grew by 2% in Australia in 2013-14, by 4% in the European Union and the US, and 8% in New Zealand, where output is seen growing by 2% this season.

However, China, the top importing country, has seen a "slowdown" in purchases, after buyers in 2013 and early 2014 stockpiled dairy products.

China's inventory levels of imported milk powder are "falling, but [are] still above normal levels", Fonterra said.

The comments came as the group unveiled a 76% slide in earnings to NZ$179m for the year to May. While revenues rose 19% to $22.3bn, high milk costs squeezed margins.

agrimoney.com